UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period
ended September 30, 2006
Commission file number 001-31721
AXIS CAPITAL HOLDINGS
LIMITED
(Exact
name of registrant as specified in its charter)
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Bermuda |
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98-0395986 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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92 Pitts Bay Road, Pembroke HM 08, Bermuda
(Address of principal executive offices and zip code)
(441) 496-2600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer x |
Accelerated filer o |
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of October 30, 2006 there were 152,194,232 Common Shares, $0.0125 par value per share, of the registrant outstanding.
AXIS CAPITAL HOLDINGS LIMITED
INDEX TO FORM 10-Q
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Page No |
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PART I. FINANCIAL INFORMATION |
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3 |
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Consolidated Balance Sheets as at September 30, 2006 and December 31, 2005 (Unaudited) |
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3 |
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4 |
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5 |
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6 |
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7 |
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8 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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26 |
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47 |
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48 |
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PART II. OTHER INFORMATION |
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49 |
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50 |
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50 |
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50 |
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PART I - FINANCIAL
INFORMATION
Item 1. Financial Statements
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As at September 30, 2006 and December 31, 2005
(Expressed
in thousands of U.S. dollars, except share amounts)
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September 30, 2006 |
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December 31, 2005 |
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Assets |
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Cash and cash equivalents |
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$ |
1,640,914 |
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$ |
1,280,990 |
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Fixed
maturity investments at fair market value |
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6,523,009 |
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6,012,425 |
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Other investments |
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714,381 |
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409,504 |
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Accrued interest receivable |
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65,235 |
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59,784 |
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Securities lending collateral |
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1,010,846 |
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998,349 |
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Insurance and reinsurance premium balances receivable |
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1,233,125 |
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1,026,975 |
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Deferred acquisition costs |
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272,110 |
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196,388 |
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Prepaid reinsurance premiums |
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274,972 |
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281,579 |
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Reinsurance recoverable balances |
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1,315,395 |
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1,455,248 |
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Reinsurance recoverable balances on paid losses |
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49,287 |
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62,862 |
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Intangible assets |
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34,543 |
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37,013 |
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Other assets |
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120,385 |
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104,859 |
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Total Assets |
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$ |
13,254,202 |
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$ |
11,925,976 |
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Liabilities |
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Reserve for losses and loss expenses |
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$ |
4,995,074 |
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$ |
4,743,338 |
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Unearned premiums |
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2,167,364 |
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1,760,467 |
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Insurance and reinsurance balances payable |
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287,445 |
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314,232 |
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Accounts payable and accrued expenses |
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109,656 |
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101,179 |
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Securities lending payable |
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1,006,806 |
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995,287 |
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Net payable for investments purchased |
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47,781 |
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76 |
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Debt |
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499,127 |
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499,046 |
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Total Liabilities |
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9,113,253 |
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8,413,625 |
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Shareholders’ Equity |
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Share Capital |
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Series A Preferred
shares |
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125 |
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125 |
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Series B Preferred
shares |
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31 |
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31 |
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Common shares |
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1,875 |
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1,861 |
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Additional paid-in capital |
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2,423,013 |
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2,386,200 |
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Accumulated other comprehensive loss |
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(54,673 |
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(77,798 |
) |
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Retained earnings |
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1,770,578 |
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1,201,932 |
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Total Shareholders’ Equity |
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4,140,949 |
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3,512,351 |
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Total Liabilities & Shareholders’ Equity |
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$ |
13,254,202 |
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$ |
11,925,976 |
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See accompanying notes to Consolidated Financial Statements (Unaudited)
3
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Quarters and Nine Months Ended September 30, 2006 and 2005
(Expressed in
thousands of U.S. dollars, except share and per share amounts)
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Quarters Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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September 30, |
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September 30, |
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Revenues |
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Gross premiums written |
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$ |
734,910 |
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$ |
794,571 |
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$ |
2,895,030 |
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$ |
2,760,563 |
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Premiums ceded |
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(128,997 |
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(276,854 |
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(476,057 |
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(564,979 |
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Change in unearned premiums |
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86,867 |
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99,097 |
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(413,500 |
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(328,767 |
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Net premiums earned |
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692,780 |
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616,814 |
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2,005,473 |
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1,866,817 |
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Net investment income |
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98,787 |
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67,015 |
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284,018 |
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177,774 |
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Net realized losses |
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(1,722 |
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(6,435 |
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(22,428 |
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(5,997 |
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Other insurance related income (loss) |
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804 |
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236 |
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1,866 |
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(5,283 |
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Total revenues |
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790,649 |
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677,630 |
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2,268,929 |
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2,033,311 |
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Expenses |
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Net losses and loss expenses |
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365,958 |
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1,035,270 |
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1,096,598 |
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1,702,413 |
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Acquisition costs |
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103,615 |
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64,436 |
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295,151 |
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241,208 |
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General and administrative expenses |
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68,470 |
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44,237 |
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181,538 |
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155,335 |
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Foreign exchange losses (gains) |
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2,738 |
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1,727 |
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(25,427 |
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52,371 |
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Interest expense |
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8,239 |
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8,360 |
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24,639 |
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24,257 |
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Total expenses |
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549,020 |
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1,154,030 |
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1,572,499 |
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2,175,584 |
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Income (loss) before income taxes |
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241,629 |
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(476,400 |
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696,430 |
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(142,273 |
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Income tax (expense) benefit |
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(6,181 |
) |
8,325 |
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(23,540 |
) |
(1,158 |
) |
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Net income (loss) |
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235,448 |
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(468,075 |
) |
672,890 |
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(143,431 |
) |
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Preferred share dividends |
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(9,226 |
) |
— |
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(28,083 |
) |
— |
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Net income (loss) available to common shareholders |
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$ |
226,222 |
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$ |
(468,075 |
) |
$ |
644,807 |
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$ |
(143,431 |
) |
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Weighted average common shares and common shares equivalent—basic |
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149,884,027 |
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140,995,298 |
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149,656,707 |
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142,711,852 |
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Weighted average common shares and common shares equivalents outstanding—diluted |
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164,700,926 |
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140,995,298 |
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163,862,658 |
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142,711,852 |
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Net income (loss) per common share: |
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Basic |
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$ |
1.51 |
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$ |
(3.32 |
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$ |
4.31 |
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$ |
(1.01 |
) |
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Diluted |
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$ |
1.37 |
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$ |
(3.32 |
) |
$ |
3.94 |
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$ |
(1.01 |
) |
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Dividends declared per common share |
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$ |
0.15 |
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$ |
0.15 |
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$ |
0.45 |
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$ |
0.45 |
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See accompanying notes to Consolidated Financial Statements (Unaudited)
4
AXIS CAPITAL HOLDINGS
LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
For the Quarters and Nine Months Ended September 30, 2006 and 2005
(Expressed
in thousands of U.S. dollars)
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Quarters Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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September 30, |
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September 30, |
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||||
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Net income (loss) |
|
$ |
235,448 |
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$ |
(468,075 |
) |
$ |
672,890 |
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$ |
(143,431 |
) |
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Other comprehensive income (loss), net of tax |
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Net actuarial loss on defined benefit retirement plan |
|
— |
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— |
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(384 |
) |
— |
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||||
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Unrealized gains (losses) on investments arising during the period |
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110,691 |
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(44,847 |
) |
33,875 |
|
(52,214 |
) |
||||
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Adjustment for re-classification of gains (losses) realized in income |
|
1,215 |
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(9,704 |
) |
(10,366 |
) |
(15,507 |
) |
||||
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Comprehensive income (loss) |
|
$ |
347,354 |
|
$ |
(522,626 |
) |
$ |
696,015 |
|
$ |
(211,152 |
) |
See accompanying notes to Consolidated Financial Statements (Unaudited)
5
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
For the Nine Months Ended September 30, 2006 and 2005
(Expressed
in thousands of U.S. dollars)
|
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2006 |
|
2005 |
|
||
|
Preferred Shares |
|
|
|
|
|
||
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Balance at beginning and end of period |
|
$ |
156 |
|
$ |
125 |
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|
Common Shares |
|
|
|
|
|
||
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Balance at beginning of period |
|
1,861 |
|
1,910 |
|
||
|
Issued during period |
|
14 |
|
19 |
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||
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Repurchased during period |
|
— |
|
(160 |
) |
||
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Balance at end of period |
|
1,875 |
|
1,769 |
|
||
|
Additional paid-in capital |
|
|
|
|
|
||
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Balance at beginning of period |
|
2,386,200 |
|
2,017,144 |
|
||
|
Shares issued during period, net of costs |
|
(28 |
) |
240,097 |
|
||
|
Repurchased during period |
|
— |
|
(349,840 |
) |
||
|
Stock option exercise |
|
17,237 |
|
3,301 |
|
||
|
Stock option expense |
|
3,093 |
|
6,423 |
|
||
|
Stock compensation expense |
|
16,511 |
|
14,682 |
|
||
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Balance at end of period |
|
2,423,013 |
|
1,931,807 |
|
||
|
Accumulated other comprehensive loss |
|
|
|
|
|
||
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Balance at beginning of period |
|
(77,798 |
) |
12,915 |
|
||
|
Change in net actuarial loss on defined benefit retirement plan |
|
(384 |
) |
— |
|
||
|
Change in unrealized gains (losses) on investments |
|
23,825 |
|
(72,944 |
) |
||
|
Change in deferred taxes |
|
(316 |
) |
5,223 |
|
||
|
Balance at end of period |
|
(54,673 |
) |
(54,806 |
) |
||
|
Retained earnings |
|
|
|
|
|
||
|
Balance at beginning of period |
|
1,201,932 |
|
1,206,095 |
|
||
|
Preferred shares dividends |
|
(28,083 |
) |
— |
|
||
|
Common share dividends |
|
(76,161 |
) |
(69,947 |
) |
||
|
Net income (loss) for period |
|
672,890 |
|
(143,431 |
) |
||
|
Balance at end of period |
|
1,770,578 |
|
992,717 |
|
||
|
Total Shareholders’ Equity |
|
$ |
4,140,949 |
|
$ |
2,871,612 |
|
See accompanying notes to Consolidated Financial Statements (Unaudited)
6
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2006 and 2005
(Expressed
in thousands of U.S. dollars)
|
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|
2006 |
|
2005 |
|
||
|
Cash flows provided by operating activities: |
|
|
|
|
|
||
|
Net income (loss) |
|
$ |
672,890 |
|
$ |
(143,431 |
) |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
||
|
Net realized losses (gains) on sales of investments |
|
23,774 |
|
7,808 |
|
||
|
Change in carrying value of other investments |
|
(12,545 |
) |
(3,937 |
) |
||
|
Net amortization on fixed maturities and other investments |
|
23,569 |
|
23,763 |
|
||
|
Amortization of deferred compensation and option expense |
|
19,604 |
|
17,984 |
|
||
|
Amortization of intangible assets |
|
2,470 |
|
2,743 |
|
||
|
Amortization of deferred debt expenses |
|
338 |
|
340 |
|
||
|
Accrued interest receivable |
|
(5,451 |
) |
(92 |
) |
||
|
Insurance and reinsurance premium balances receivable |
|
(206,150 |
) |
(230,909 |
) |
||
|
Deferred acquisition costs |
|
(75,722 |
) |
(31,396 |
) |
||
|
Prepaid reinsurance premiums |
|
6,607 |
|
(29,648 |
) |
||
|
Reinsurance recoverable balances |
|
139,853 |
|
(696,687 |
) |
||
|
Reinsurance recoverable balances on paid losses |
|
13,575 |
|
(21,117 |
) |
||
|
Reserve for losses and loss expenses |
|
251,736 |
|
2,086,800 |
|
||
|
Unearned premiums |
|
406,897 |
|
358,415 |
|
||
|
Insurance and reinsurance balances payable |
|
(26,787 |
) |
77,984 |
|
||
|
Accounts payable and accrued expenses |
|
(632 |
) |
(8,484 |
) |
||
|
Other items |
|
(4,292 |
) |
(288,255 |
) |
||
|
Total adjustments |
|
556,844 |
|
1,265,312 |
|
||
|
Net cash provided by operating activities |
|
1,229,734 |
|
1,121,881 |
|
||
|
Cash flows provided by (used in) investing activities: |
|
|
|
|
|
||
|
Acquisition of subsidiaries, net of cash accrued |
|
— |
|
(27,772 |
) |
||
|
Purchases of available-for-sale securities |
|
(3,861,569 |
) |
(4,859,210 |
) |
||
|
Sales and maturities of available-for-sale securities |
|
3,384,106 |
|
4,377,594 |
|
||
|
Purchases of other investments |
|
(301,267 |
) |
(234,100 |
) |
||
|
Net cash used in investing activities |
|
(778,730 |
) |
(743,488 |
) |
||
|
Cash flows provided by (used in) financing activities: |
|
|
|
|
|
||
|
Common share dividends |
|
(68,030 |
) |
(62,232 |
) |
||
|
Preferred shares dividends |
|
(28,083 |
) |
— |
|
||
|
Repurchase of shares |
|
— |
|
(350,000 |
) |
||
|
Issuance of shares, net |
|
17,223 |
|
246,663 |
|
||
|
Net cash used in financing activities |
|
(78,890 |
) |
(165,569 |
) |
||
|
|
|
|
|
|
|
||
|
Effect of exchange rate changes on foreign currency cash |
|
(12,190 |
) |
17,031 |
|
||
|
Increase in cash and cash equivalents |
|
359,924 |
|
229,855 |
|
||
|
Cash and cash equivalents—beginning of period |
|
1,280,990 |
|
632,329 |
|
||
|
Cash and cash equivalents—end of period |
|
$ |
1,640,914 |
|
$ |
862,184 |
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
||
|
Income taxes paid |
|
$ |
36,485 |
|
$ |
23,864 |
|
|
Interest paid |
|
$ |
14,375 |
|
$ |
15,677 |
|
See accompanying notes to Consolidated Financial Statements (Unaudited)
7
AXIS
CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in tables expressed in thousands of U.S. dollars,
except for ratios, share and per share amounts)
1. Basis of Preparation and Consolidation
These unaudited consolidated financial statements include the accounts of AXIS Capital Holdings Limited (“AXIS Capital”) and its subsidiaries (together, the “Company”) and have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The major estimates reflected in the Company’s consolidated financial statements include the reserve for losses and loss expenses, premium estimates for business written on a line slip or proportional basis, and reinsurance recoverable balances. The terms “FAS” and “FASB” used in these notes refer to Statements of Financial Accounting Standards issued by the United States Financial Accounting Standards Board.
This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2006.
2. Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the Interpretation. The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The Company is currently evaluating the potential impact of FIN 48 on its financial statements when adopted.
In September 2006, the FASB issued FAS 157, Fair Value Measurement. This Statement provides guidance for using fair value to measure assets and liabilities. Under this standard, the definition of fair value focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). FAS 157 clarifies that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets and the lowest priority to unobservable data. Further, FAS 157 requires tabular disclosures of the fair value measurements by level within the fair value hierarchy. FAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year. The Company is currently evaluating the potential impact of FAS 157 on its financial statements when adopted.
8
In September 2006, the FASB issued FAS 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R). This Statement requires an entity to recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status; measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. FAS 158 does not affect how an entity computes the net periodic benefit cost recognized in net income. The requirement to recognize the funded status of a defined benefit postretirement plan and the disclosure requirements are effective for fiscal years ending after December 15, 2006. However, the requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year is deferred to fiscal years ending after December 15, 2008. The Company is currently evaluating the potential impact of FAS 158 on its financial statements when adopted.
3. Segment Information
The Company evaluates the performance of its insurance and reinsurance segments based on underwriting results. The Company writes business that has loss experience generally characterized as low frequency and high severity. This may result in volatility in both the Company’s and an individual segment’s operating results and cash flows. The Company does not allocate its assets by segment as it evaluates the underwriting results of each segment separately from the results of its investment portfolio.
Insurance
The Company’s insurance segment provides insurance coverage on a worldwide basis and is divided into two sub-segments: global insurance and U.S. insurance.
Global insurance provides specialty lines coverage, predominantly through the London broker network. The product lines in this segment are property, marine, terrorism and war risk, aviation and aerospace, political risk, professional lines and other specialty.
U.S. insurance provides specialty lines coverage through a variety of channels in the U.S. and covers exposures predominantly in the U.S. The product lines in this segment are property, professional lines, liability and other specialty and are offered through wholesale brokers, retail brokers and managing general agents and underwriters.
Reinsurance
The Company’s reinsurance segment provides treaty property and casualty reinsurance to insurance companies on a worldwide basis. Treaty reinsurance contracts are contractual arrangements that provide for automatic reinsurance of any agreed upon portion of business written as specified in a reinsurance contract. Contracts can be written on an excess of loss basis or a pro rata basis, also known as proportional. The product lines in this segment are catastrophe, property, professional liability, credit and bond, motor, liability and other.
The following tables summarize the underwriting results, income before income taxes, ratios and the reserves for losses and loss expenses for the Company’s reportable operating segments and sub-segments for the quarters and nine months ended September 30, 2006 and 2005.
9
Quarter ended September 30, 2006
|
|
|
Global |
|
U.S. |
|
Total |
|
Reinsurance |
|
Corporate |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Gross premiums written |
|
$ |
177,350 |
|
$ |
275,766 |
|
$ |
453,116 |
|
$ |
281,794 |
|
$ |
— |
|
$ |
734,910 |
|
|
Net premiums written |
|
169,128 |
|
154,490 |
|
323,618 |
|
282,295 |
|
— |
|
605,913 |
|
||||||
|
Net premiums earned |
|
189,229 |
|
138,472 |
|
327,701 |
|
365,079 |
|
— |
|
692,780 |
|
||||||
|
Other insurance related income |
|
— |
|
412 |
|
412 |
|
392 |
|
— |
|
804 |
|
||||||
|
Net losses and loss expenses |
|
(98,024 |
) |
(84,256 |
) |
(182,280 |
) |
(183,678 |
) |
— |
|
(365,958 |
) |
||||||
|
Acquisition costs |
|
(27,364 |
) |
(13,432 |
) |
(40,796 |
) |
(62,819 |
) |
— |
|
(103,615 |
) |
||||||
|
General and administrative expenses |
|
(11,502 |
) |
(24,639 |
) |
(36,141 |
) |
(12,162 |
) |
— |
|
(48,303 |
) |
||||||
|
Underwriting income |
|
$ |
52,339 |
|
$ |
16,557 |
|
$ |
68,896 |
|
$ |
106,812 |
|
$ |
— |
|
$ |
175,708 |
|
|
Corporate expenses |
|
|
|
|
|
|
|
|
|
(20,167 |
) |
(20,167 |
) |
||||||
|
Net investment income |
|
|
|
|
|
|
|
|
|
98,787 |
|
98,787 |
|
||||||
|
Net realized losses on investments |
|
|
|
|
|
|
|
|
|
(1,722 |
) |
(1,722 |
) |
||||||
|
Foreign exchange losses |
|
|
|
|
|
|
|
|
|
(2,738 |
) |
(2,738 |
) |
||||||
|
Interest expense |
|
|
|
|
|
|
|
|
|
(8,239 |
) |
(8,239 |
) |
||||||
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
$ |
241,629 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net loss and loss expense ratio |
|
51.8 |
% |
60.8 |
% |
55.6 |
% |
50.3 |
% |
|
|
52.8 |
% |
||||||
|
Acquisition cost ratio |
|
14.5 |
% |
9.7 |
% |
12.4 |
% |
17.2 |
% |
|
|
15.0 |
% |
||||||
|
General and administrative expense ratio |
|
6.1 |
% |
17.8 |
% |
11.0 |
% |
3.3 |
% |
2.9 |
% |
9.9 |
% |
||||||
|
Combined ratio |
|
72.4 |
% |
88.3 |
% |
79.0 |
% |
70.8 |
% |
|
|
77.7 |
% |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Reserve for losses and loss expenses |
|
$ |
1,520,551 |
|
$ |
1,631,531 |
|
$ |
3,152,082 |
|
$ |
1,842,992 |
|
$ |
n/a |
|
$ |
4,995,074 |
|
10
Quarter ended September 30, 2005
|
|
|
Global |
|
U.S. |
|
Total |
|
Reinsurance |
|
Corporate |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Gross premiums written |
|
$ |
191,616 |
|
$ |
268,967 |
|
$ |
460,583 |
|
$ |
333,988 |
|
$ |
— |
|
$ |
794,571 |
|
|
Net premiums written |
|
63,813 |
|
124,061 |
|
187,874 |
|
329,843 |
|
— |
|
517,717 |
|
||||||
|
Net premiums earned |
|
141,359 |
|
107,174 |
|
248,533 |
|
368,281 |
|
— |
|
616,814 |
|
||||||
|
Other insurance related income |
|
— |
|
236 |
|
236 |
|
— |
|
— |
|
236 |
|
||||||
|
Net losses and loss expenses |
|
(308,024 |
) |
(130,500 |
) |
(438,524 |
) |
(596,746 |
) |
— |
|
(1,035,270 |
) |
||||||
|
Acquisition costs |
|
(13,293 |
) |
1,722 |
|
(11,571 |
) |
(52,865 |
) |
— |
|
(64,436 |
) |
||||||
|
General and administrative expenses |
|
(9,039 |
) |
(19,716 |
) |
(28,755 |
) |
(12,187 |
) |
— |
|
(40,942 |
) |
||||||
|
Underwriting loss |
|
$ |
(188,997 |
) |
$ |
(41,084 |
) |
$ |
(230,081 |
) |
$ |
(293,517 |
) |
$ |
— |
|
$ |
(523,598 |
) |
|
Corporate expenses |
|
|
|
|
|
|
|
|
|
(3,295 |
) |
(3,295 |
) |
||||||
|
Net investment income |
|
|
|
|
|
|
|
|
|
67,015 |
|
67,015 |
|
||||||
|
Net realized losses on investments |
|
|
|
|
|
|
|
|
|
(6,435 |
) |
(6,435 |
) |
||||||
|
Foreign exchange losses |
|
|
|
|
|
|
|
|
|
(1,727 |
) |
(1,727 |
) |
||||||
|
Interest expense |
|
|
|
|
|
|
|
|
|
(8,360 |
) |
(8,360 |
) |
||||||
|
Loss before income taxes |
|
|
|
|
|
|
|
|
|
|
|
$ |
(476,400 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net loss and loss expense ratio |
|
217.9 |
% |
121.8 |
% |
176.4 |
% |
162.0 |
% |
|
|
167.8 |
% |
||||||
|
Acquisition cost ratio |
|
9.4 |
% |
(1.6 |
)% |
4.7 |
% |
14.4 |
% |
|
|
10.4 |
% |
||||||
|
General and administrative expense ratio |
|
6.4 |
% |
18.4 |
% |
11.6 |
% |
3.3 |
% |
0.6 |
% |
7.2 |
% |
||||||
|
Combined ratio |
|
233.7 |
% |
138.6 |
% |
192.7 |
% |
179.7 |
% |
|
|
185.4 |
% |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Reserve for losses and loss expenses |
|
$ |
1,513,221 |
|
$ |
1,379,010 |
|
$ |
2,892,231 |
|
$ |
1,622,046 |
|
|
|
$ |
4,514,277 |
|
|
11
Nine Months Ended September 30, 2006
|
|
|
Global |
|
U.S. |
|
Total |
|
Reinsurance |
|
Corporate |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Gross premiums written |
|
$ |
700,383 |
|
$ |
819,388 |
|
$ |
1,519,771 |
|
$ |
1,375,259 |
|
$ |
— |
|
$ |
2,895,030 |
|
|
Net premiums written |
|
604,684 |
|
449,110 |
|
1,053,794 |
|
1,365,179 |
|
— |
|
2,418,973 |
|
||||||
|
Net premiums earned |
|
554,996 |
|
418,989 |
|
973,985 |
|
1,031,488 |
|
— |
|
2,005,473 |
|
||||||
|
Other insurance related income |
|
— |
|
1,474 |
|
1,474 |
|
392 |
|
— |
|
1,866 |
|
||||||
|
Net losses and loss expenses |
|
(247,346 |
) |
(238,889 |
) |
(486,235 |
) |
(610,363 |
) |
— |
|
(1,096,598 |
) |
||||||
|
Acquisition costs |
|
(78,506 |
) |
(38,500 |
) |
(117,006 |
) |
(178,145 |
) |
— |
|
(295,151 |
) |
||||||
|
Corporate general and administrative expenses |
|
(32,674 |
) |
(71,395 |
) |
(104,069 |
) |
(34,377 |
) |
— |
|
(138,446 |
) |
||||||
|
Underwriting income |
|
$ |
196,470 |
|
$ |
71,679 |
|
$ |
268,149 |
|
$ |
208,995 |
|
$ |
— |
|
$ |
477,144 |
|
|
Corporate expenses |
|
|
|
|
|
|
|
|
|
(43,092 |
) |
(43,092 |
) |
||||||
|
Net investment income |
|
|
|
|
|
|
|
|
|
284,018 |
|
284,018 |
|
||||||
|
Net realized losses on investments |
|
|
|
|
|
|
|
|
|
(22,428 |
) |
(22,428 |
) |
||||||
|
Foreign exchange gains |
|
|
|
|
|
|
|
|
|
25,427 |
|
25,427 |
|
||||||
|
Interest expense |
|
|
|
|
|
|
|
|
|
(24,639 |
) |
(24,639 |
) |
||||||
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
$ |
696,430 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net loss and loss expense ratio |
|
44.6 |
% |
57.0 |
% |
49.9 |
% |
59.2 |
% |
|
|
54.7 |
% |
||||||
|
Acquisition cost ratio |
|
14.1 |
% |
9.2 |
% |
12.0 |
% |
17.3 |
% |
|
|
14.7 |
% |
||||||
|
General and administrative expense ratio |
|
5.9 |
% |
17.0 |
% |
10.7 |
% |
3.3 |
% |
2.1 |
% |
9.1 |
% |
||||||
|
Combined ratio |
|
64.6 |
% |
83.2 |
% |
72.6 |
% |
79.8 |
% |
|
|
78.5 |
% |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Reserve for losses and loss expenses |
|
$ |
1,520,551 |
|
$ |
1,631,531 |
|
$ |
3,152,082 |
|
$ |
1,842,992 |
|
|
|
$ |
4,995,074 |
|
|
12
Nine Months Ended September 30, 2005
|
|
|
Global |
|
U.S. |
|
Total |
|
Reinsurance |
|
Corporate |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Gross premiums written |
|
$ |
671,451 |
|
$ |
731,363 |
|
$ |
1,402,814 |
|
$ |
1,357,749 |
|
— |
|
$ |
2,760,563 |
|
|
|
Net premiums written |
|
481,248 |
|
366,391 |
|
847,639 |
|
1,347,945 |
|
— |
|
2,195,584 |
|
||||||
|
Net premiums earned |
|
562,934 |
|
321,996 |
|
884,930 |
|
981,887 |
|
— |
|
1,866,817 |
|
||||||
|
Other insurance related (loss) income |
|
(5,865 |
) |
582 |
|
(5,283 |
) |
— |
|
— |
|
(5,283 |
) |
||||||
|
Net losses and loss expenses |
|
(451,958 |
) |
(272,876 |
) |
(724,834 |
) |
(977,579 |
) |
— |
|
(1,702,413 |
) |
||||||
|
Acquisition costs |
|
(72,830 |
) |
(5,017 |
) |
(77,847 |
) |
(163,361 |
) |
— |
|
(241,208 |
) |
||||||
|
General and administrative expenses |
|
(28,523 |
) |
(60,804 |
) |
(89,327 |
) |
(36,818 |
) |
— |
|
(126,145 |
) |
||||||
|
Underwriting income (loss) |
|
$ |
3,758 |
|
$ |
(16,119 |
) |
$ |
(12,361 |
) |
$ |
(195,871 |
) |
$ |
— |
|
$ |
(208,232 |
) |
|
Corporate expenses |
|
|
|
|
|
|
|
|
|
(29,190 |
) |
(29,190 |
) |
||||||
|
Net investment income |
|
|
|
|
|
|
|
|
|
177,774 |
|
177,774 |
|
||||||
|
Net realized losses on investments |
|
|
|
|
|
|
|
|
|
(5,997 |
) |
(5,997 |
) |
||||||
|
Foreign exchange losses |
|
|
|
|
|
|
|
|
|
(52,371 |
) |
(52,371 |
) |
||||||
|
Interest expense |
|
|
|
|
|
|
|
|
|
(24,257 |
) |
(24,257 |
) |
||||||
|
Loss before income taxes |
|
|
|
|
|
|
|
|
|
|
|
$ |
(142,273 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net loss and loss expense ratio |
|
80.3 |
% |
84.7 |
% |
81.9 |
% |
99.6 |
% |
|
|
91.2 |
% |
||||||
|
Acquisition cost ratio |
|
12.9 |
% |
1.6 |
% |
8.8 |
% |
16.6 |
% |
|
|
12.9 |
% |
||||||
|
General and administrative expense ratio |
|
5.1 |
% |
18.9 |
% |
10.1 |
% |
3.7 |
% |
1.5 |
% |
8.3 |
% |
||||||
|
Combined ratio |
|
98.3 |
% |
105.2 |
% |
100.8 |
% |
119.9 |
% |
|
|
112.4 |
% |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Reserve for losses and loss expenses |
|
$ |
1,513,221 |
|
$ |
1,379,010 |
|
$ |
2,892,231 |
|
$ |
1,622,046 |
|
|
|
$ |
4,514,277 |
|
|
13
4. Benefit plans
(a) Employee Benefit Plans
1) Retirement Plans
The Company provides retirement benefits to eligible employees through various plans sponsored by the Company.
(i) Defined contribution plans
The Company has several defined contribution plans that are managed externally pursuant to which employees and the Company contribute on a monthly basis. During the quarter ended September 30, 2006, expenses totaled $2.0 million (2005: $1.7 million). During the nine months ended September 30, 2006, expenses totaled $5.6 million (2005: $4.7 million).
(ii) Defined benefit plans
Effective January 1, 2004, the Company implemented supplemental retirement plans (“SERPs”) for two executives. The SERP for Mr. Charman, President and Chief Executive Officer, requires the Company to make annual payments to Mr. Charman upon his retirement for a period of 20 years. The benefits vest over a period of two years commencing in 2006. Commencing at age 56, Mr. Charman is entitled to an annual payment of $0.8 million compounded by 3% annually for each year commencing from inception. The SERP for Mr. Butt, Chairman, requires the Company to make annual payments to Mr. Butt upon his retirement for a period of 10 years. The benefits vest over a period of two years commencing in 2006. Commencing at age 66, Mr. Butt is entitled to an annual payment of $0.3 million compounded by 3% annually for each year commencing from inception. If either Mr. Charman or Mr. Butt dies, is permanently disabled or a change of control of the Company occurs, the remaining benefits under his plan are payable by the Company in a lump sum. The benefits received under the SERPs will be reduced by the benefits received by the executives under the Company’s Bermuda retirement plan. The measurement date of the plan was January 1, 2005. The plan was fully funded in January 2006.
Effective May 12, 2006, the SERP for Mr. Butt was amended to delay by one year the timing of retirement benefits to be paid to Mr. Butt and to increase the amount of retirement benefits by $0.1 million for the first five years of retirement.
The following table shows the components of pension expense for the quarters and nine months ended September 30, 2006 and 2005 and the amounts included in the Company’s Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005 for the Company’s SERPs:
|
|
|
Quarters Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
|
||||
|
Components of pension expense |
|
|
|
|
|
|
|
|
|
||||
|
Amortization of prior service cost |
|
$ |
568 |
|
$ |
537 |
|
$ |
1,704 |
|
$ |
1,610 |
|
|
Interest cost |
|
185 |
|
171 |
|
553 |
|
513 |
|
||||
|
Expected return on plan assets |
|
(179 |
) |
— |
|
(536 |
) |
— |
|
||||
|
Pension expense |
|
$ |
574 |
|
$ |
708 |
|
$ |
1,721 |
|
$ |
2,123 |
|
The weighted-average assumptions used to determine net periodic pension cost and benefit obligations were:
14
|
|
|
Quarters Ended |
|
Nine Months Ended |
|
||||
|
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
|
|
Discount rate |
|
5.75 |
% |
6.0 |
% |
5.75 |
% |
6.0 |
% |
|
Expected return on plan assets |
|
5.75 |
% |
6.0 |
% |
5.75 |
% |
6.0 |
% |
|
|
September 30, |
|
December 31, |
|
|||
|
Changes in plan assets |
|
|
|
|
|
||
|
Fair value of plan assets at beginning of period |
|
$ |
— |
|
$ |
— |
|
|
Expected return on plan assets |
|
536 |
|
— |
|
||
|
Employer contribution |
|
12,840 |
|
— |
|
||
|
Fair value of plan assets at end of period |
|
$ |
13,376 |
|
$ |
— |
|
|
|
September 30, |
|
December 31, |
|
|||
|
|
|
|
|
|
|
||
|
Components of benefit obligation |
|
|
|
|
|
||
|
Benefit obligation at beginning of period |
|
$ |
12,439 |
|
$ |
11,371 |
|
|
Interest cost |
|
550 |
|
683 |
|
||
|
Amendments |
|
315 |
|
385 |
|
||
|
Benefit obligation at end of period |
|
$ |
13,304 |
|
$ |
12,439 |
|
|
|
|
|
|
|
|
||
|
Reconciliation of Funded Status |
|
|
|
|
|
||
|
Funded Status |
|
$ |
— |
|
$ |
(12,439 |
) |
|
Unrecognized loss |
|
385 |
|
385 |
|
||
|
Unrecognized prior service cost |
|
4,715 |
|
6,436 |
|
||
|
Prepaid (accrued) benefit cost |
|
$ |
5,100 |
|
$ |
(5,618 |
) |
2) Long Term Equity Compensation Plan
The Company has adopted a Long-Term Equity Compensation Plan (“LTEC”) that provides for the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, performance share and performance unit awards and share purchase rights. The maximum number of common shares with respect to which awards may be granted under the plan is 14,855,192, of which 1,200,000 are available for issuance pursuant to share purchase rights and of which 13,655,192 are available for issuance under all other awards. The plan is administered by the Compensation Committee of the Board of Directors.
Effective January 1, 2006, the Company adopted, prospectively, the fair value recognition provisions of FAS No. 123 (revised) “Share-Based Payments (“FAS No. 123 (R)”) for all unvested stock options and restricted shares that were outstanding on January 1, 2006 that are granted or subsequently modified or cancelled. Compensation expense for stock options and for restricted stock awards granted to employees is recorded over the vesting period using the fair value method, net of estimated forfeitures. For awards that have a graded vesting schedule, the Company recognizes compensation expense on a straight-line basis over the vesting period for each separate vesting portion of the award as if the award was, in-substance, multiple awards. The Company has not issued awards subject to performance and market conditions.
The compensation cost recognized in the nine months of 2006 includes compensation cost for all share-based payments granted prior to, but not vested as of January 1, 2006, based on the grant-date fair value estimated
15
in accordance with FAS No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with FAS No. 123 (R). Prior periods have not been restated to reflect the adoption of the new standard. The adoption of FAS No. 123 (R) did not have a significant impact on net income and basic and diluted earnings per share for the nine months ended September 30, 2006.
On January 1, 2003, the Company adopted FAS No. 123 by applying the prospective method permitted under FAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Prior to 2003, the Company followed Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock compensation. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123 to all of its stock-based compensation prior to January 1, 2003.
|
|
|
Quarters Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
|
||||
|
Net income (loss) available to common shareholders, as reported |
|
$ |
226,222 |
|
$ |
(468,075 |
) |
$ |
644,807 |
|
$ |
(143,431 |
) |
|
Add: Stock-based employee compensation expense included in net income, net of related tax effects |
|
5,709 |
|
5,552 |
|
16,433 |
|
16,057 |
|
||||
|
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects |
|
(5,709 |
) |
(5,731 |
) |
(16,433 |
) |
(16,593 |
) |
||||
|
Pro-forma net income (loss) available to common shareholders |
|
$ |
226,222 |
|
$ |
(468,254 |
) |
$ |
644,807 |
|
$ |
(143,967 |
) |
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
||||
|
Basic—as reported |
|
$ |
1.51 |
|
$ |
(3.32 |
) |
$ |
4.31 |
|
$ |
(1.01 |
) |
|
Basic—pro-forma |
|
$ |
1.51 |
|
$ |
(3.32 |
) |
$ |
4.31 |
|
$ |
(1.01 |
) |
|
Diluted—as reported |
|
$ |
1.37 |
|
$ |
(3.32 |
) |
$ |
3.94 |
|
$ |
(1.01 |
) |
|
Diluted—pro-forma |
|
$ |
1.37 |
|
$ |
(3.32 |
) |
$ |
3.94 |
|
$ |
(1.01 |
) |
(i) Options
Options granted under the plan generally expire 10 years after the date of grant and generally vest ratably on an annual basis over three years from the date of grant. Exercise prices are established at the fair value of the Company’s common shares at the date of grant. Upon exercise, new shares are issued by the Company.
During the quarter ended September 30, 2006, the Company expensed $1.3 million (quarter ended September 30, 2005: $1.7 million) related to the grant of options and realized a tax benefit of $0.2 million (quarter ended September 30, 2005: $0.4 million). During the nine months ended September 30, 2006, the Company expensed $3.0 million (nine months ended September 30, 2005: $3.8 million) related to the grant of options and realized a tax benefit of $1.1 million (nine months ended September 30, 2005: $1.3 million). At September 30, 2006, there was $1.7 million of unrecognized compensation cost related to options which is expected to be recognized over the weighted average period of 1 year. The total intrinsic value of options exercised during the nine months ended September 30, 2006 was $11.0 million (year ended December 31, 2005: $10.3 million) and the Company received proceeds of $16.9 million (year ended December 31, 2005: $8.6 million). The total intrinsic value of options vested at September 30, 2006, was $75.7 million (year ended December 31, 2005: $69.9 million). The fair value of options granted during 2006 was $0.2 million (year ended December 31, 2005: $6.4 million). The grants in 2006 reflect modifications to grants made in prior years to an employee pursuant to a severance
16
agreement. The earlier grants were deemed cancelled and new grants issued at the new terms. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2006: risk free interest rates of 4.6% (2005: 4.2%), expected life of 0.3 years (2005: 7.0 years), a dividend yield of 1.7% (2005: 2.5%) and an expected volatility of 20% (2005: 22%). The Company has elected to use the simplified method of calculating the expected life of the options, which is the average of the vesting period and the expiry period.
The following is a summary of stock options granted under the LTEC and related activity:
|
|
Nine Months Ended |
|
Year Ended |
|
|||||||
|
|
|
Number of |
|
Weighted |
|
Number of |
|
Weighted |
|
||
|
Outstanding—beginning of period |
|
6,054,464 |
|
$ |
18.99 |
|
5,622,181 |
|
$ |
16.38 |
|
|
Granted |
|
45,000 |
|
26.90 |
|
1,269,834 |
|
28.01 |
|
||
|
Exercised |
|
(899,146 |
) |
18.84 |
|
(653,881 |
) |
13.13 |
|
||
|
Forfeited |
|
(113,333 |
) |
29.09 |
|
(183,670 |
) |
25.92 |
|
||
|
Outstanding—end of period |
|
5,086,985 |
|
$ |
18.86 |
|
6,054,464 |
|
$ |
18.99 |
|
The following table summarizes information about the Company’s stock options for options granted under the LTEC and outstanding as of September 30, 2006:
|
|
Options Outstanding |
|
Options Exercisable |
|
|||||||||||
|
Range of Exercise prices |
|
|
|
Number of |
|
Weighted |
|
Weighted |
|
Number of |
|
Weighted |
|
||
|
$12.50-$13.75 |
|
2,583,147 |
|
$ |
12.55 |
|
5.35 |
|
2,583,147 |
|
$ |
12.55 |
|
||
|
$13.76-$15.00 |
|
599,000 |
|
14.50 |
|
6.20 |
|
599,000 |
|
14.50 |
|
||||
|
$15.01-$16.25 |
|
53,334 |
|
16.25 |
|
6.67 |
|
53,334 |
|
16.25 |
|
||||
|
$16.26-$25.65 |
|
59,000 |
|
25.54 |
|
7.08 |
|
39,334 |
|
25.54 |
|
||||
|
$25.66-$29.62 |
|
1,792,504 |
|
$ |
28.81 |
|
7.65 |
|
909,331 |
|
$ |
29.09 |
|
||
In addition, the Company receives a tax deduction for certain stock option exercises in the period of exercise. In accordance with FAS No. 123 (R), the consolidated statement of cash flows for the nine months ended September 30, 2006 includes excess tax benefits of $0.4 million on exercise of stock options as a financing cash flow.
(ii) Restricted Stock
The fair value of restricted share grants is determined using the closing price of the Company’s shares on the New York Stock Exchange on the day prior to the grant, with grants generally vesting three years after the date of grant or upon the employee’s earlier retirement, death, permanent disability or a change in control of the Company. Restricted shares are entitled to vote and to receive dividends but may not be transferred during the period of restriction and are forfeited if the employee’s employment terminates prior to vesting. Compensation cost equivalent to the estimated fair market value at the date of grant for the number of shares expected to fully vest is amortized over a three-year vesting period. As of September 30, 2006, there was $35.2 million of unrecognized compensation cost related to these awards which is expected to be recognized over the weighted average period of 1.5 years. The total fair value of shares vested during the nine months ended September 30, 2006 was $3.0 million
17
(year ended December 31, 2005: $25.7 million). During the quarter ended September 30, 2006, the Company expensed $5.4 million (quarter ended September 30, 2005: $4.6 million) in respect of restricted stock, and recorded tax benefits thereon of $0.7 million (quarter ended September 30, 2005: $0.8 million). During the nine months ended September 30, 2006, the Company expensed $16.2 million (nine months ended September 30, 2005: $14.5 million) in respect of restricted stock, and recorded tax benefits thereon of $2.5 million (nine months ended September 30, 2005: $2.4 million).
The following is a summary of restricted stock granted under the LTEC and related activity:
|
|
September 30, 2006 |
|
December 31, 2005 |
|
|||||||
|
|
|
Number of |
|
Weighted |
|
Number of |
|
Weighted |
|
||
|
Nonvested—beginning of period |
|
1,175,750 |
|
$ |
28.40 |
|
2,126,700 |
|
$ |
17.36 |
|
|
Granted |
|
1,288,750 |
|
30.99 |
|
898,750 |
|
28.35 |
|
||
|
Vested |
|
(110,000 |
) |
27.26 |
|
(1,723,330 |
) |
14.91 |
|
||
|
Forfeited |
|
(103,750 |
) |
21.01 |
|
(126,400 |
) |
26.18 |
|
||
|
Nonvested—end of period |
|
2,250,750 |
|
$ |
30.28 |
|
1,175,750 |
|
$ |
28.40 |
|
The grants in 2006 include modifications to grants made in prior years to an employee pursuant to a severance agreement. The earlier grants were deemed cancelled and new grants issued at the new terms.
(b) Director Benefit Plans
(1) 2004 Directors Long-Term Equity Compensation Plan
The Company has adopted a Directors Long-Term Equity Compensation Plan (“DLTECP”) that provides for the grant of non-qualified stock options and stock awards (restricted and unrestricted) to non-employee directors of the Company. The maximum number of common shares with respect to which awards may be granted under the plan is 1,200,000. The plan is administered by the Compensation Committee of the Board of Directors.
(i) Options
Options granted under the plan generally expire 10 years after the date of grant and generally vest ratably on an annual basis over three years from the date of grant. Exercise prices are established at the fair value of the Company’s common shares at the date of grant. Upon exercise, new shares are issued by the Company.
During the quarter ended September 30, 2006, the Company expensed $0.06 million (quarter ended September 30, 2005: $0.05 million) related to the grant of options. During the nine months ended September 30, 2006, the Company expensed $0.1 million (nine months ended September 30, 2005: $0.1 million) related to the grant of options. At September 30, 2006, there was $0.07 million of unrecognized compensation cost related to options which is expected to be recognized over the weighted average period of 1 year. The total intrinsic value of options exercised during the nine months ended September 30, 2006 was $0.09 million (December 31, 2005: $nil) and the Company received proceeds of $0.03 million (year ended December 31, 2005: $nil) and realized no tax benefit. The total intrinsic value of options vested at September 30, 2006, was $0.7 million (December 31, 2005: $0.3 million). There were no option grants during the nine months ended September 30, 2006, and the fair value of options granted during 2005 was $0.2 million. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2005: risk free interest rates of 4.2%, expected life of 7 years, a dividend yield of 2.5% and an expected volatility of 22%. The Company has elected to use the simplified method of calculating the expected life of the options, which is the average of the vesting period and the expiry period.
18
The following is a summary of stock options granted under the DLTECP and related activity:
|
|
Nine Months Ended |
|
Year Ended |
|
|||||||
|
|
|
Number of |
|
Weighted |
|
Number of |
|
Weighted |
|
||
|
Outstanding—beginning of period |
|
120,000 |
|
$ |
25.19 |
|
72,000 |
|
$ |
23.68 |
|
|
Granted |
|
— |
|
— |
|
48,000 |
|
27.45 |
|
||
|
Exercised |
|
(13,332 |
) |
23.84 |
|
— |
|
— |
|
||
|
Outstanding—end of period |
|
106,668 |
|
$ |
25.36 |
|
120,000 |
|
$ |
25.19 |
|
The following table summarizes information about the Company’s stock options granted under the DLTECP and for options outstanding as of September 30, 2006:
|
|
|
Options Outstanding |
|
Options Exercisable |
|
||||||||||
|
Range of Exercise prices |
|
|
|
Number of |
|
Weighted Average |
|
Weighted |
|
Number of |
|
WeightedAverage |
|
||
|
$15.01-$16.25 |
|
26,667 |
|
$ |
16.25 |
|
6.25 |
|
26,667 |
|
$ |
16.25 |
|
||
|
$25.66-$29.62 |
|
80,001 |
|
$ |
28.39 |
|
7.82 |
|
34,668 |
|
$ |
28.79 |
|
||
(ii) Restricted Stock
The fair value of restricted share grants is determined using the closing price of the Company’s shares on the New York Stock Exchange on the day prior to the grant, with grants generally vesting six months after the date of grant or upon the director’s earlier retirement, death, permanent disability or a change in control of the Company. Restricted shares are entitled to vote and to receive dividends but may not be transferred during the period of restriction and are forfeited if the director resigns prior to vesting. Compensation cost equivalent to the estimated fair market value at the date of grant for the number of shares expected to fully vest is amortized over a six-month vesting period. As of September 30, 2006, there was no unrecognized compensation cost related to these awards. The total fair value of shares vested during the quarter ended September 30, 2006 was $0.3 million (year ended December 31, 2005: $0.1 million). During the quarter ended September 30, 2006, the Company expensed $0.1 million (quarter ended September 30, 2005: $nil) in respect of restricted stock, and recorded no tax benefits. During the nine months ended September 30, 2006, the Company expensed $0.3 million (quarter ended September 30, 2005: $0.1 million) in respect of restricted stock, and recorded no tax benefits.
19
The following is a summary of restricted stock granted under the DLTECP and related activity:
|
|
|
Nine Months Ended |
|
Year Ended |
|
||||||
|
|
|
Number |
|
Weighted |
|
Number |
|
Weighted |
|
||
|
Nonvested —beginning of period |
|
— |
|
$ |
— |
|
— |
|
$ |
— |
|
|
Granted |
|
9,282 |
|
31.78 |
|
4,368 |
|
27.45 |
|
||
|
Vested |
|
(9,282 |
) |
31.78 |
|
(4,368 |
) |
27.45 |
|
||
|
Nonvested—end of period |
|
— |
|
$ |
— |
|
— |
|
$ |
— |
|
In addition, directors may elect to receive their fees in common shares rather than cash. As at September 30, 2006, 44,834 (December 31, 2005: 40,235) common shares had been granted under the plan in lieu of fees. All awards are made at the fair market value of the common shares at the time of the grant.
(2) 2004 Directors Deferred Compensation Plan
The Company has an unfunded nonqualified deferred compensation plan that allows participating directors to elect (i) the amount, if any, of cash or stock as fees for services to be deferred and (ii) the form in which payment is to be made. Directors who choose to defer fees otherwise payable in shares are credited a number of phantom stock units equal in amount to the number of shares of stock deferred. In the event a cash dividend is declared on the stock, the portion of the participant’s deferral account denominated in phantom share units is credited with additional phantom share units (or portions thereof). Directors who choose to defer fees otherwise payable in cash are credited with interest on their cash deferral at a rate for the year of deferral that is 100 basis points above the 12-month LIBOR rate for deposits of U.S. dollars. Generally, benefits are paid upon termination of service as a director. As at September 30, 2006, 36,579 (December 31, 2005: 31,411) phantom share units had been issued under the plan in lieu of fees, and 11,857 (December 31, 2005: 6,657) had been issued in lieu of restricted shares.
5. Investments
The following table summarizes the fixed maturity investments in an unrealized loss position at September 30, 2006 and December 31, 2005 and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
As at September 30, 2006:
|
|
|
12 months or greater |
|
Less than 12 months |
|
Total |
|
||||||||||||
|
|
|
Fair Value |
|
Unrealized |
|
Fair Value |
|
Unrealized |
|
Fair Value |
|
Unrealized |
|
||||||
|
U.S. government and agency securities |
|
$ |
598,306 |
|
$ |
(15,011 |
) |
$ |
338,655 |
|
$ |
(2,552 |
) |
$ |
936,961 |
|
$ |
(17,563 |
) |
|
Non - U.S. government securities |
|
4,209 |
|
(135 |
) |
31,381 |
|
(2,470 |
) |
35,590 |
|
(2,605 |
) |
||||||
|
Corporate securities |
|
467,313 |
|
(10,504 |
) |
506,117 |
|
(6,590 |
) |
973,430 |
|
(17,094 |
) |
||||||
|
Mortgage-backed securities |
|
1,208,818 |
|
(30,326 |
) |
664,933 |
|
(9,375 |
) |
1,873,751 |
|
(39,701 |
) |
||||||
|
Asset-backed securities |
|
149,932 |
|
(2,289 |
) |
111,984 |
|
(474 |
) |
261,916 |
|
(2,763 |
) |
||||||
|
Municipals |
|
143,013 |
|
(1,981 |
) |
68,005 |
|
(184 |
) |
211,018 |
|
(2,165 |
) |
||||||
|
Total |
|
$ |
2,571,591 |
|
$ |
(60,246 |
) |
$ |
1,721,075 |
|
$ |
(21,645 |
) |
$ |
4,292,666 |
|
$ |
(81,891 |
) |
20
As at December 31, 2005:
|
|
|
12 months or greater |
|
Less than 12 months |
|
Total |
|
||||||||||||
|
|
|
Fair Value |
|
Unrealized |
|
Fair Value |
|
Unrealized |
|
Fair Value |
|
Unrealized |
|
||||||
|
U.S. government and agency securities |
|
$ |
527,787 |
|
$ |
(10,823 |
) |
$ |
746,012 |
|
$ |
(9,406 |
) |
$ |
1,273,799 |
|
$ |
(20,229 |
) |
|
Non - U.S. government securities |
|
— |
|
— |
|
115,871 |
|
(6,196 |
) |
115,871 |
|
(6,196 |
) |
||||||
|
Corporate securities |
|
258,287 |
|
(6,361 |
) |
813,927 |
|
(14,314 |
) |
1,072,214 |
|
(20,675 |
|||||||